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Economic and Financial Effects of Rising Defense Spending

Author

Listed:
  • Martijn Boermans
  • Martin Hodula
  • Josef Simpartl

Abstract

Europe is undergoing its largest rearmament since the Cold War, raising questions about the economic and financial consequences of higher defense spending. Drawing on a panel of 28 European countries, this brief finds that rising defense spending is associated with higher output in the short run while inflationary pressures build up only later, after about two to three years. The inflationary response is likely to be uneven: stronger where equipment is produced domestically and weaker where it is imported. Financial markets moved in parallel. Defense equity prices rose sharply in anticipation of higher spending, and European investors, including Czech households, increased their defense holdings markedly, reflecting both return expectations and geopolitical hedging.

Suggested Citation

  • Martijn Boermans & Martin Hodula & Josef Simpartl, 2026. "Economic and Financial Effects of Rising Defense Spending," Research Briefs 2026/03, Czech National Bank, Research and Statistics Department.
    • Handle: RePEc:cnb:rbrief:2026/03
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    File URL: https://www.cnb.cz/en/economic-research/research-publications/research-brief/Economic-and-Financial-Effects-of-Rising-Defense-Spending/
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